Crestwood Buys Out Powder River Basin JV Partner Williams In $485 Million Deal

Crestwood Equity Partners LP doubled its position in the Powder River Basin after buying out its joint venture (JV) partner’s half in the Jackalope gas gathering system on April 11.

The Williams Cos. Inc. agreed to sell its 50% interest and turn over operatorship in the Jackalope system to a subsidiary of Houston-based Crestwood for roughly $485 million. Crestwood said it funded the acquisition through a $235 million issuance of preferred equity and borrowing under its revolver.

The Jackalope assets are comprised of the Jackalope Gas Gathering System and Bucking Horse Processing Plant located in Converse County, Wyo. The system is supported by a 358,000 acreage dedication by Chesapeake Energy Corp. and a 30,000 acreage dedication by Panther Energy.

Currently, the Jackalop system is averaging gathering volumes of roughly 140 million cubic feet per day with system processing capacity set to more than double by 2020.

As a result of the acquisition, Crestwood will be one of the largest gas processors in the Powder River Basin.

Meanwhile, Tulsa, Okla.-based Williams expects the transaction to eliminate $90 million of 2019 capex associated with Jackalope capital spending. The company plans to use the savings as well as proceeds from the sale to further its delevergaing initiative.

Analysts with Tudor, Pickering, Holt & Co. (TPH) said Williams’ divestiture allows the company to cash in potential upside for “attractive near-term implied mid-teens EBITDA multiple.”

“While we continue to like self-help initiatives undertaken by management, risk of continued level setting of throughput expectations across Williams’ natural gas gathering footprint may weigh on medium-term sentiment,” the TPH analysts said in a research note on April 11.

The transaction for Crestwood follows a strategy set out by Crestwood management earlier this year to expand its operational footprint in the four basins the company considers its core areas of growth—the Bakken, Powder River, Delaware Basin and Marcellus.

On an earnings call in February, Crestwood CEO Robert G. Phillips noted the company had adopted a partnership model back in 2016 because, “like everybody else,” Crestwood had too much debt, according to a transcript from Seeking Alpha.

However, since then, as its assets have matured and the plays are better delineated, Phillips said Crestwood has started considering consolidating its partnerships if the opportunity arises.

“We are totally committed to the four basins that we operate in and so, from time-to-time, if we see an opportunity to acquire additional equity interest in the assets that we already own a piece of and feel strong about … then we will look to opportunistically add to our equity interest in those partnerships,” he said on the call. “Having said that, this is a difficult time in the capital markets. So, it has to be done carefully and thoughtfully and not in a way that adds extra burden to our balance sheet.”

Analysts with Capital One Securities Inc. noted Crestwood also has 50/50 JVs with First Reserve in the Permian Basin and with Con Edison in the Marcellus Shale that could be potential targets for future consolidations.

In a statement on April 10, Phillips called the Jackalope acquisition a rare find.

“By already owning 50% of the Jackalope system, our teams have an in-depth understanding of the economics of the Powder River Basin, the development plans and corresponding capital requirements for our existing and prospective customers, and the long-term prospects for future growth on and around our Jackalope system, all of which uniquely positioned Crestwood to capitalize on this opportunity,” he said.

RBC Capital Markets was financial adviser to Williams for the transaction and Davis Polk & Wardell provided the company legal counsel. Evercore was Crestwood’s financial adviser and Vinson & Elkins served as its legal counsel.

Global Infrastructure Partners led the existing preferred equity investment of the Crestwood subsidiary, Crestwood Niobrara LLC, that acquired the Jackalope assets in the transaction.

Crestwood also launched a private $500 million debt offering on April 11, which it plans to use to repay the expected $250 million borrowed on its revolver for the Jackalope acquisition.

Crestwood said the Jackalope transaction was not subject to regulatory approval and closed with an effective date of April 9.

Emily Patsy can be reached at epatsy@hartenergy.com.